A federal judge has ruled that units of Bank of America Corp. will have to pay a penalty of more than $1 billion for utilizing a program that sacrificed loan quality for loan quantity.
The case originated in February 2012, when former Countrywide Financial Corp. vice president Edward O’Donnell filed a qui tam action.
Such actions are filed under the whistleblower provision of the False Claims Act. If the government intervenes, as they did in this case, the plaintiff is entitled to a substantial portion of any awards.
In his lawsuit, O’Donnell alleged that through the “High Speed Swim Lane” — or “Hustle” — program, the BofA subsidiary committed fraud.
Even when internal reports raised red flags about deteriorating loan quality — loan specialists were pressured to ignore quality concerns.
As a result of the alleged fraud, nearly $3 billion in loans were purchased by Fannie Mae and Freddie Mac that otherwise wouldn’t have been.
A jury subsequently found that Countrywide and its former executive Rebecca Mairone intentionally misrepresented the quality of loans closed through the “Hustle” program.
Mairone, who was the chief operating officer of Countrywide’s subprime subsidiary, Full Spectrum Lending, “was a leader in designing and implementing the HSSLÂ program,” the court decision stated.
The defendants were found civilly liable for fraud in violation of the Financial Institutions Reform, Recovery, and Enforcement Act.
So U.S. District Judge Jed S. Rakoff was left to determine what civil penalties should be imposed.
In his determination, Rakoff considered how many loans were run through the program.
The government alleges that 28,882 loans were closed through the nefarious program. Its assertion is based on the date that underwriters were again required to clear loans for closing, which started on May 22, 2008.
But the defendants claim that the number was 11,481. That number reflects an April 2008 end to the program, a point when Countrywide reintroduced the quality-assurance checklist. It also considered “Hustle” loans that were reviewed, though not cleared to close, by an underwriter. In addition, the number excluded 11,057 loans processed through field branches.
The judge determined that 17,611 “Hustle” loans were closed.
But he noted in his decision that 57 percent of the loans purchased by Fannie and Freddie turned out not to be materially defective.
“On this basis, the court will reduce the penalty to be imposed to 42.81 percent of the statutory maximum, or $1,267,491,770,” Rakoff wrote in his decision.
“In short, while the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole,” the decision stated. “The HSSL fraud, simply by itself, more than warrants a penalty of $1,267,491,770.”
BofA has until Sept. 2 to pay the penalty.
The judge had harsh words for Mairone, who he said was eager to prove herself as a relatively new employee. He said she denounced anyone who raised concerns about the program, directed quality assurance reports be sent only to her, and directed that loan specialists not be notified about errors on the loans. She also eliminated the quality assurance checklist and made other changes to increase originations at the expense of quality.
While the government sought a $1.2 million penalty for Mairone, Rakoff lowered the amount to $1.0 million to be repaid in quarterly payments equal to 20 percent of her gross income until paid in full.
